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Mutual Daily Mutterings


Quote of the day…

“Before Volcker’s speech, bonds had been conservative investments, into which investors put their savings when they didn’t fancy a gamble in the stock market. After Volcker’s speech, bonds became objects of speculation, a means of creating wealth rather than merely storing it” – Micahel Lews, Liar’s Poker






“Fed Air…




“When Will They Learn…?”




Overview…”Patience is no longer a virtue…”

  • Moves: risk off … stocks , bond yields , credit spreads , volatility and oil ….
  • Stocks closed down a fair notch on the back of hawkish Fed speak.  US Treasuries were smoked. OATS, BUNDS, and GILTS blew up also with ten-year yields closing +10 – 15 bps higher on the day.   Following evidence of further atrocities and war crimes, Russia faces a new round of western sanctions…that’ll stop them, just like the last round, the same again please guvna!  Oil eased off a touch, but not a lot in it.  Credit spreads across the board continued their grind tighter.
  • Fed speak…”given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery…. the reduction in the balance sheet will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the committee’s Summary of Economic Projections.” (Fed member, Lael Brainard).
  • Talking heads…”this Fed has been clear as a bell about what we should expect from them. They did exactly what we expected that first time in March and now they’re being even more clear about 50 in May. So, as we move toward May, stocks can get their expectation in line about what we might see.”
  • Deutsche Bank nailed their view to the mast on the outlook for the US economy.  The Teutonic bank is predicting the US will run into a recession next year as the Fed jacks up rates to combat inflation with DB pencilling in three consecutive +50 bps rate hikes over coming meetings.  Closer to home, Goldman Sachs is less melodramatic, saying recession was far from inevitable given households and businesses alike are flush with cash.
  • The RBA dropped ‘patience’ from its statement yesterday.  The bank left rates unchanged at 0.10% and the statement was on the hawkish side.  Gut feel, the finger is hovering, itching and quivering over the trigger, although at the same time there wasn’t a strong sense of urgency in the statement, but timing for the first-rate hike in over 10 years is closer, likely in “coming months”, subject to data.  BBSW 3M is back at 0.25% (+2 bps).


The Long Story….

  • Offshore Stocks – hawkish Fed comments took its toll on investor sentiment with markets in the red.  The DOW fell -0.8%, the S&P 500 -1.3% and the NASADAQ -2.3%.  Around 71% of stocks in the S&P 500 retreated and only four sectors were able to gain ground, and not much at that.  They were: Utilities (+0.7%), Healthcare (+0.2%), Staples (+0.1%) and REITS (+0.1%).  Doing all the damage down the other end was Discretionary (-2.4%), Tech (-2.2%) and Energy (-1.5%).  Futures in after market trading are firmly in the red.
  • Local Stocks – modest gains yesterday, +0.2%, led by Tech (+3.1%), Energy (+2.2%), and Utilities (+1.7%), while Materials (-0.8%) and REITS (-0.5%) were the main headwinds.  A touch over half (57%) of the ASX 200 advanced.  Offshore leads will dominate today, with futures down -0.6% as I type.  A pull back is arguably timely and appropriate given the index is only a bee’s bum hair away from setting new all-time highs, all despite a pretty volatile and uncertain geopolitical back drop, and of course tightening financial conditions.  Too frothy for mine.  The ASX 200 is up +7.6% since the start of the Russia-Ukraine war and +10.1% from YTD lows (end of January).


  • ASX 200 Relative Strength Indicators

Source: Bloomberg


  • Offshore credit – spreads continued to compress across US IG and EU IG markets, although the pace of tightening has moderated.  Across corporate and financials in both markets, spreads have tightened 20 – 30 bps since their mid-March peaks, potentially enticing more issuers to come to market.  Nevertheless, it was tumble weeds across US IG markets overnight, no new deals announced.  EU IG markets were a little more-frisky, with 1o issuers launching deals and raising €13.8bn.  Still in Europe, the rate of defaults among EU high yield bonds rose through March for the first time in just under a year.  According to research published by JPM, the 12-month trailing default rate rose 0.1% to 0.7%.  Given the bruhaha in Ukraine, and all the collateral damage to the European (and world) economy, default rates are expected to climb.  Notwithstanding, the volume of debt trading at distressed levels (typically +1000 bps) fell to 1.9% from 2.5% a month earlier, so investors still not overly concerned, at least not enough to drive spreads wider.


  • Offshore Credit Spreads2014 – now

Source: Bloomberg, Mutual Limited


  • Local Credit – before we head to primary action, secondary market commentary…traders “a resumption of rates volatility curtailed what had been a constructive few days in local credit markets. The advent of forthcoming rate hikes continues to push curves flatter and curves wider, but how much further can they go?  Seems an awful lot priced into the front end of the ACGB curve yet until this normalises we expect credit markets to remain challenged.”  Major bank senior paper closed unchanged, although traders are noting the street is heavy with inventory, which will curtail any imminent or material spread compression hopes.
  • In the T2 space, a constructive vibe was noted in early trading, but then the sneaky people in CBA Treasury, surprised the market by announcing a new 10-NC-5 T2 deal.   I suspect CBA saw the success of SUN’s recent 15.2-NC-5.2 deal and thought they’d like some of that action, and with the other majors in black out, there is no competition for oxygen.  SUN priced its 15.2-NC-5.2 deal at +230 bps (initial guidance at +250 bps), which then tightened steadily into +214 bps.  Demand for the paper at primary was solid (>$1bn).  This deal was issued out of the HoldCo and was rated BBB+, the same as major bank T2.  Despite the announced CBA deal (no price guidance yet), major bank T2 paper closed unchanged.  Major bank 2026 callable T2 paper is being quoted around +167 – 172 bps.
  • CBA only has two A$ ‘benchmark’ T2 deals traded in local markets.  They have about eight smaller T2 deals, but they’re long-dated EMTN bullet lines, typically <$200m in size and popular with regional private banks.  Not really intended for local real money managers.  Of the more ‘normal’ T2 deals we’re used to seeing, CBA has a Sep-25 call ($1.4bn) with an issue margin of +180 bps (trading +153 bps) and an Aug-26 call ($1.5bn) with an issue margin of +132 bps (trading +170 bps).  While the recent SUN deal is rated the same as major bank tier 2, it’s not really a direct comp.  For one, it’s out of the HoldCo, indicating underlying risk is largely from the insurance business.  Also, it’s a smaller deal – $290m.  I’d expect CBA will print north of a yard in volume, so differing liquidity dynamics to the SUN deal.  I’d suggest initial guidance will come around +200 bps (±5 bps), with final pricing somewhere around +190 bps (±5 bps), so ~30 bps inside the SUN deal.
  • Bonds & Rates – local bond markets where whipsawed around yesterday with three-year yields down -6 bps in early trading, staying there until the RBA statement was released.  The key outtake was the abandonment of ‘patience’ around policy setting ahead of growing inflationary pressures.  This saw yields rip higher, with three-year yields closing +10 bps on the day at 2.49%.  Ten-year bonds were marginally less whippy, but whippy nonetheless, down as much as -7 bps pre-RBA (in the morning), but then went vertical, +7 bps to close +2 bps from opening levels, closing at 2.86%.  Following the release of the RBA Board Meeting statement, market pricing for RBA rate hikes steepened (chart below) with the first-rate hike clearly priced in for June.  BBSW 3M has now reached 0.25% and rising.
  • US treasuries were smoked overnight with US 2-year yields up +9 bps to 2.51% and 10-year yields up +15 bps to 2.55%, obviously sending the 2s10s curve back into a ‘normal’ position…, 3s10s on the other hand are still negative.    The Fed overnight indicated a clear preference to drain the monetary punchbowl and turn the house lights on in a bid to clear the dance floor…translation: keep cutting rates and begin reducing the Fed’s balance sheet, rapidly.  The Federal Open Market Committee stated it will “will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.”  Relative strength indicators are signalling treasuries have moved into ‘oversold’ territory…if you believe in that kind of stuff.


  • RBA Rate Hike Pricing…change post the RBA meeting statement


Source: Bloomberg


  • Macro – RBA board meeting commentary…key outtakes: as per above, removal of any willingness to be ‘patient’.  On the economic backdrop, the board noted “inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target. Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs.” With regard to the labour market, the board commented that “the strength of the Australian economy is evident in the labour market, with the unemployment rate falling further to 4% in February. Underemployment is also at its lowest level in many years. Job vacancies and job ads are at high levels and point to continuing strong growth in employment over the months ahead. The RBA’s central forecast is for the unemployment rate to fall to below 4 per cent this year and to remain below 4% next year.”  While wages have picked up, it has been selective, with aggregate figures on or around pre-pandemic levels.  Markets are pricing in June for the first rate hike of this cycle.
  • More from Fed member Lael Brainard, on US inflation…”currently, inflation is much too high and is subject to upside risks. The committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.  On the other side, I am attentive to signals from the yield curve at different horizons and from other data that might suggest increased downside risks to activity.”






Source: Bloomberg, Mutual Limited


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Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907



Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.40%
MIF – Mutual Income Fund
Gross running yield: 1.44%
Yield to maturity: 1.39%
MCF – Mutual Credit Fund
Gross running yield: 2.80%
Yield to maturity: 2.29%
MHYF – Mutual High Yield Fund
Gross running yield: 5.81%
Yield to maturity: 5.73%